MATERIAL FORMULAS

MATERIAL

1) Reorder level = Maximum usage * Maximum lead time

                             (Or) Minimum level + (Average usage * Average Lead time)

2) Minimum level = Reorder level – (Average usage * Average lead time)

3) Maximum level = Reorder level + Reorder quantity – (Minimum usage *

                                                                                              Minimum lead time)

4) Average level = Minimum level +Maximum level              (or)

                                                      2

                                Minimum level + ½ Reorder quantity

 5) Danger level (or)   safety stock level

                             =Minimum usage * Minimum lead time (preferred)

           (or)               Average usage * Average lead time

           (or)               Average usage * Lead time for emergency purposes

6) EOQ (Economic Order Quantity - Wilson’s Formula) = √2AO/C

         Where A = Annual usage units

                     O = Ordering cost per unit

                   C = Annual carrying cost of one unit

                        i.e. Carrying cast % * Carrying cost of  unit

7) Associated cost = Buying cost pa + Carrying cost pa

8) Under EOQ Buying cost = Carrying cost

9) Carrying Cost = Average inventory * Carrying cost per unit pa * Carrying cost %

               (Or)          Average Inventory * Carrying cost per order pa

10) Average inventory = EOQ/2

11) Buying cost = Number of Orders * ordering cost

12) Number of Orders = Annual Demand / EOQ

13) Inventory Turnover (T.O) Ratio = Material consumed

                                                     Average Inventory

14) Inventory T.O Period =                         365                   .

                                                     Inventory Turn over Ratio              

15) safety stock = Annual Demand *(Maximum lead time - Average lead time)

                                      365                 

16) Total Inventory cost = Ordering cost + Carrying cost of inventory +Purchase cost

17) Input Output Ratio = Quantity of input of material to production

                                          Standard material content of actual output

Remarks :-

1) High Inventory T.O Ratio indicates that the material in the question is fast moving

2) Low Inventory T.O Ratio indicates over investment and locking up of working

     Capital in inventories

Pricing of material Issues:-

1) Cost price method:-

    a) Specific price method      

    b) First in First Out method (FIFO)

    c) Last in First Out method (LIFO)

    d) Base stock method

2) Average price method:-

    a) Simple average price method =          Total unit price   

                                                      Total No. of purchases

   

    b) Weighted average price method =       Total cost

                                                     Total No. of units

   

     c) Periodic simple average price method = Total unit price of certain period

                                                                      Total Number of purchases of that period                                         (This rate is used for all issues for that period. Period means a month (or) week (or) year)

    d) Periodic weighted average price method = Total cost of certain period                                          

                                                                             Total Number of units of that period

    e) Moving simple average price method

                     = Total of periodic simple average of certain number of periods

                                                        Number of periods

    f) Moving weighted average price method

             = Total of periodic weighted average of certain number of periods

                               Number of periods

3) Market price method:-

    a) Replacement price method = Issues are valued as if it was purchased now at

                                                        current market price

    b) Realizable price method = Issues are valued at price if it is sold now

4) Notional price method:-

    a) Standard price method = Materials are priced at pre determined rate (or)

                                                                                                        Standard rate

    b) Inflated price method = The issue price is inflated to cover the losses incurred

                                                due to natural(or)climatic losses

5) Re use price method = When materials are returned (or) rejected it is valued at

     different price. There is no final procedure for this method.

ABC Analysis (or) Pareto Analysis :-  In this materials are categorized into

          Particulars                                     Quantity                 Value

“A” – Important material                           10%                             70%

“B” – Neither important nor unimportant           20%                              20%

“C” – UN Important                                             70%                             10%

Note:-

1) Material received as replacement from supplier is treated as fresh supply

2) If any material is returned from Department after issue, it has to be first

    disposed in the next issue of material

3) loss in the book balance of stock and actual is to be transferred to Inventory

     adjustment a/c and from there if the loss is normal it is transferred to Over Head

     control a/c. If it is abnormal it is transferred to costing profit and loss a/c.

         

 4) CIF = Cost Insurance and Freight (This consignment is inclusive of prepaid  insurance and freight)

5) FOB = Free on Board (Materials moving by sea – insurance premium is not  paid)

6) FOR = Free on Rail (Insurance and freight is not borne by the supplier but paid

                                                      by the company or purchase)

7) For each receipt of goods = Goods Receipt note

8) For each issue of goods = Materials Requisition note (or) Material Issue note

Accounting Treatment :-

1) Normal Wastage = It should be distributed over goods output increasing per unit cost

2) Abnormal Wastage= It will be charged to costing profit and loss a/c

3) Sale value of scrap is credited to costing profit and loss a/c as an abnormal gain.                                                     

4) Sale proceeds of the scrap can be deducted from material cost or factory overheads.

5) Sale proceeds of scrap may be credited to particular job.

6) Normal Defectives = cost of rectification of defectives should be charged to specific

7) Abnormal Defectives = This should be charged to costing profit and loss a/c

8) Cost of Normal spoilage is to borne by good units

9) Abnormal spoilage should be charged to costing profit and loss a/c

CLASSIFICATION OF COSTS AND COST SHEET

CLASSIFICATION OF COSTS: Manufacturing

We first classify costs according to the three elements of cost:

a) Materials             b) Labour                  c) Expenses

Product and Period Costs: We also classify costs as either

1      Product costs: the costs of manufacturing our products; or

2      Period costs: these are the costs other than product costs that are charged to,

        debited to, or written off to the income statement each period.

The classification of Product Costs:

Direct costs: Direct costs are generally seen to be variable costs and they are called direct costs because they are directly associated with manufacturing. In turn, the direct costs can include:

• Direct materials: plywood, wooden battens, fabric for the seat and the back, nails, screws, glue. 
• Direct labour: sawyers, drillers, assemblers, painters, polishers, upholsterers
• Direct expense: this is a strange cost that many texts don't include; but (International Accounting Standard) IAS 2, for example, includes it.  Direct expenses can include the costs of special designs for one batch, or run, of a particular set of tables and/or chairs, the cost of buying or hiring special machinery to make a limited edition of a set of chairs. 

Total direct costs are collectively known as Prime Costs and we can see that Product Costs are the sum of Prime costs and Overheads.

Indirect Costs: Indirect costs are those costs that are incurred in the factory but that cannot be directly associate with manufacture.  Again these costs are classified according to the three elements of cost, materials labour and overheads.

• Indirect materials: Some costs that we have included as direct materials would be included here.
• Indirect labour: Labour costs of people who are only indirectly associated with manufacture: management of a department or area, supervisors, cleaners, maintenance and repair technicians
• Indirect expenses: The list in this section could be infinitely long if we were to try to include every possible indirect cost.  Essentially, if a cost is a factory cost and it has not been included in any of the other sections, it has to be an indirect expense. Here are some examples include:

                            Depreciation of equipment, machinery, vehicles, buildings

                            Electricity, water, telephone, rent, Council Tax, insurance

Total indirect costs are collectively known as Overheads.

Finally, within Product Costs, we have Conversion Costs: these are the costs incurred in the factory that are incurred in the conversion of materials into finished goods.

The classification of Period Costs:

The scheme shows five sub classifications for Period Costs.  When we look at different organisations, we find that they have period costs that might have sub classifications with entirely different names. Unfortunately, this is the nature of the classification of period costs; it can vary so much according to the organisation, the industry and so on.  Nevertheless, such a scheme is useful in that it gives us the basic ideas to work on.

Administration Costs: Literally the costs of running the administrative aspects of an organisation.  Administration costs will include salaries, rent, Council Tax, electricity, water, telephone, depreciation, a potentially infinitely long list.  Notice that there are costs here such as rent, Council Tax, that appear in several sub classifications; in such cases, it should be clear that we are paying rent on buildings, for example, that we use for manufacturing and storage and administration and each area of the business must pay for its share of the total cost under review.

Without wishing to overly extend this listing now, we can conclude this discussion by saying that the costs of Selling, the costs of Distribution and the costs of Research are all accumulated in a similar way to the way in which Administration Costs are accumulated. Consequently, our task is to look at the selling process and classify the costs of running that process accordingly: advertising, market research, salaries, bonuses, electricity, and so on. The same applies to all other classifications of period costs that we might use.

Finance Costs: Finance costs are those costs associated with providing the permanent, long term and short term finance. That is, within the section headed finance costs we will find dividends, interest on long term loans and interest on short term loans.

Finally, we should say that we can add any number of subclassifications to our scheme if we need to do that to clarify the ways in which our organisation operates.  We will also add further subclassifications if we need to refine and further refine out cost analysis.

COST SHEET – FORMAT

Particulars	Amount	Amount
Opening Stock of Raw Material    Add: Purchase of Raw materials                Add: Purchase Expenses                              Less: Closing stock of Raw Materials                     Raw Materials Consumed                       Direct Wages (Labour)                          Direct Charges	*** *** *** *** *** *** ***
Prime cost (1)		***
Add :- Factory Over Heads:           Factory Rent                                               Factory Power                                          Indirect Material                                      Indirect Wages                                                        Supervisor Salary                                Drawing Office Salary                        Factory Insurance                                Factory Asset Depreciation	*** *** *** *** *** *** *** ***
Works cost Incurred		***
Add: Opening Stock of WIP                                       Less: Closing Stock of WIP	*** ***
Works cost (2)		***
Add:- Administration Over Heads:-           Office Rent                                    Asset Depreciation                                General Charges                                     Audit Fees                                             Bank Charges                                         Counting house Salary                                Other Office Expenses	*** *** *** *** *** *** ***
Cost of Production (3)		***
Add: Opening stock of Finished Goods                         Less: Closing stock of Finished Goods	*** ***
Cost of Goods Sold		***
Add:- Selling and Distribution OH:-           Sales man Commission                                   Sales man salary                                        Traveling Expenses                                     Advertisement                                           Delivery man expenses                             Sales Tax                                                       Bad Debts	*** *** *** *** *** *** ***
Cost of Sales (5)		***
Profit (balancing figure)		***
Sales		***

         

Notes:-

1) Factory Over Heads are recovered as a percentage of direct wages 

2) Administration Over Heads, Selling and Distribution Overheads are recovered as a percentage of works cost.